Downside financial risk is misunderstood
Newall PWS (2016) Downside financial risk is misunderstood. Judgement and Decision Making, 11 (5), pp. 416-423. http://journal.sjdm.org/16/16222/jdm16222.pdf
The mathematics of downside financial risk can be difficult to understand: For example a 50% loss requires a subsequent 100% gain to break-even. A given percentage loss always requires a greater percentage gain to break-even. Instead, many non-expert investors may assume for example that a 50% gain is sufficient to offset a 50% loss. Over 3,498 participants and five experiments, the widespread illusion that a sequence of equal percentage gains and losses produces a zero overall return was demonstrated. Participants continued to err frequently, even with percentage returns of +/-100%, or when financially incentivized. Financial literacy, numeracy, and deliberation were all shown to independently contribute to accurate performance. These results have implications for promoting the understanding of downside financial risk.
financial risk; downside risk; numeracy; percentages; financial literacy; deliberation
Judgement and Decision Making: Volume 11, Issue 5
|Date accepted by journal||01/09/2016|
|Publisher||Society for Judgment and Decision Making|